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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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AFLAC---Two owners of (Owners) tell me that their Aflac medical

Customer Question

AFLAC---Two owners of (Owners) tell me that their Aflac medical insurance deduction is tax free from all tax deductions. I have them set up in Intuit as after-tax, Intuit is not taxable Federal and State but is taxing S.S. and medicare. They say as owners they cannot have pre-tax.
Submitted: 5 years ago.
Category: Tax
Expert:  jgordosea replied 5 years ago.

Hello,

 

Are these owners of an S corporation?

 

If not, what is the entity type and how is it taxed, if an LLC ?

 

The answer does depend on how the entity is taxed. Thanks.

Customer: replied 5 years ago.
Yes Company is S-Corp.
Expert:  jgordosea replied 5 years ago.

Hello again,

 

Section 3121(a)(2)(8) excludes from wages subject to FICA and Medicare taxes the amounts paid by an employer to or on behalf of an employee (including amounts paid by an employer for insurance, annuities, or into a fund) for medical and hospitalization expenses in connection with sickness or accident disability. To apply, the payments must be made under a plan or system for employees and their dependents generally or for a class of employees and their dependents.

 

If the plan fits the requirements for the exclusion under section 3121(a)(2)(8) then the amounts paid by an S corporation for accident and health insurance covering a more than 2%-shareholder-employee are not wages for social security and Medicare tax purposes, even though the amounts must be included in wages for income tax withholding purposes on the 2%-shareholder-employee's Form W-2.

 

The shareholder includes hte amount as wages and can (if the other requirements are met) use the adjustment from gross income for self employed health insurance.

 

I hope this helps for correctly preparing the W-2 for a > 2% shareholder of an S corporation.

 

Best wishes.

 

 

Customer: replied 5 years ago.

Sorry I guess I did not make myself clear, the owners being employees of the S-Corp. they are the ones paying the Aflac health insurance premiums, deducted from their wages weekly. I will include the email I receive from her, may help.

 

Email from owner:

. Taxability for Social Security and/or M/C is not correct. It is not taxable Aflac for both Frank and I are after tax, there is no taxability for Aflac deductions for Federal or State, nor is there any taxability for Social Security or M/C. The only way there would be any kind of tax is for short term disability, which we do not have in our Aflac plan.

Expert:  jgordosea replied 5 years ago.

Hello again,

 

As more than 2% owners the health insurance premiums ARE subject to income tax. The email is not correct. The >2% owners are treated differently than most employees.

 

Revenue Ruling 91-26 indicates that amounts paid by an S corporation for accident and health insurance covering a 2%-shareholder-employee must be reported as wages on his or her Form W-2, Wage and Tax Statement. See also IRC Sec. 1372 as referenced in Internal Revenue Bulletin - January 14, 2008 - Notice 2008-1

 

Accident and health insurance premiums paid or furnished by an S corporation on behalf of its 2-percent shareholders in consideration for services rendered are treated for income tax purposes like partnership guaranteed payments under § 707(c) of the Code. Rev. Rul. 91-26, 1991-1 C.B. 184. An S corporation is entitled to deduct the cost of such employee fringe benefits under § 162(a) if the requirements of that section are satisfied (taking into account the rules of § 263). The premium payments are included in wages for income tax withholding purposes on the shareholder-employee's Form W-2, Wage and Tax Statement, but are not wages subject to Social Security and Medicare taxes if the requirements for exclusion under section 3121(a)(2)(B) are satisfied. See § 3121(a)(2)(B); Ann. 92-16, 1992-5 I.R.B. 53. The 2-percent shareholder is required to include the amount of the accident and health insurance premiums in gross income under § 61(a).

 

Section 106 provides an exclusion from the gross income of an employee for employer-provided coverage under an accident and health plan. A 2-percent shareholder is not an employee for purposes of §106. Treas. Reg. §1.106-1; section 1372(a). Accordingly, the premiums are not excludible from the 2-percent shareholder-employee's gross income under §106.

 

(bolding added to above quote)

 

As shown above, insurance payments paid through a plan are not subject to FICA and Medicare but are subject to income tax for a >2% owner.

 

I hope this helps to clarify for you.

 

 

Customer: replied 5 years ago.

Sorry:

You still referred to S-Corp. providing and paying these health insurance premiums for the employee. Wrong---the two employees pay the premiums, the premiums are deducted from their wages weekly.

Of course then the Corp. forwards the payment to Aflac--- but is employees money.

 

There are as of right now the 2 owners of the S-Corp. (Ownership 50/50) husband and wife. Paid as employees, it is they that pay the premiums through payroll deduction from wages weekly.

 

For me to answer them so they will understand, could you please state separately:

For the employee:

Taxable for Federal/State (Yes-No)

Taxable to SS & M/C (yes-No)

Expert:  jgordosea replied 5 years ago.

Hello again,

 

You wrote: the Corp. forwards the payment to Aflac--- but is employees money.

There is no reason for the corporation to pay the premium if it is "employees money".

 

There are reasons for the corporation NOT to pay the premium if it is "employees money". This is not proper accounting. If it is a corporate expense then the corporation should pay and deduct it. If this is a group plan formed under the corporation the corporation should pay for it.

 

If it is a personal expense (and personal ploicy) then the person should pay and deduct it. There are possible consequences of paying owner's personal expenses that can rise to invalidating the corporate existence ( aka "piercing the corporate veil").

 

Again, from Notice 2008-1 (underlining and bolding added) :

 

Accident and health insurance premiums paid or furnished by an S corporation on behalf of its 2-percent shareholders in consideration for services rendered ...are included in wages for income tax withholding purposes on the shareholder-employee's Form W-2, Wage and Tax Statement, but are not wages subject to Social Security and Medicare taxes if the requirements for exclusion under section 3121(a)(2)(B) are satisfied.

 

The proper accounting for >2% shareholders of an S corporation health insurance plan payments (and the code section does read "by or on behalf of employees") is to include the premium as wages taxable to the employee and deductible by the corporation for incoem taxes.

So, the taxable for federal/state income tax (with some state exceptions) is = Yes.

 

These payments are not subject to Social Security and Medicare taxes if the requirements for exclusion under section 3121(a)(2)(B) are satisfied.

So, the taxable for FICA/Medicare taxes = No.

 

For example, the shareholder has a salary of $1000 per pay period and $90 for premium in that period. The wages subject to income tax are $1090 and the wages subject to Fica/Medicare are $1000 for the pay period. Presuming no income tax withheld, the check stub has 1,090 gross less 90 premium less 62.00 for FICA and 14.50 for Medicare for a net check of 923.50.

The corporation reports 1090 wages paid, of which 1000 were subject to FICA/Medicare and 76.50 collected from employees for the pay period on the payroll tax reports.

The corporation reports 1090 wages paid per pay period and 76.50 payroll tax (after it is paid by the employer) on the corporate tax return.

 

The >2% shareholder reports 1090 wages and can potentially deduct the 90 as self employed health insurance as an adjustment to income if otherwise qualified.

 

It is not clear how the payroll tax reports (or corporate books) have been prepared for the premiums paid through the course of the year. Not all S corporation shareholders know how to prepare these reports.

I have seen insurance premiums treated as a distribution to the shareholder and not deducted by the corporation (which appears to be what has been attempted in your case). If the premiums have not been included in the payroll reports you may wnat to consider that to avoid amending payroll reports; but it is not the technically correct reporting.

 

I hope this helps to clarify further for you.

 

Best regards.

 

 

 

 

 

Customer: replied 5 years ago.

I.m sorry but I am not getting it.

Maybe I can say this another way.

The S Corp actually has nothing to do with paying the premiums.

The Aflac premiums are deducted from wages weekly, the Corp, simply then forwards their payment to Aflac at the end of the month, same as would be done with a Friend of Court deduction.

They are telling me that with their plan, the premium deduction from their wages are not taxable for any payroll tax's. Totally non-taxable.

It is a health insurance policy only which pays them if they are off work for medical reason.

BJ

Customer: replied 5 years ago.
Hey John, are you through trying to answer my question
Expert:  jgordosea replied 5 years ago.

Hello again,

 

I have explained the proper treatment for a health insurance plan premium that is paid by a corporation for a more than 2% shareholder. I have given you references to the code and an IRS Notice that apply.

It is not permitted to have a health insurance premium furnished by an S corporation on behalf of its 2-percent shareholders in consideration for services rendered not be subject to income tax to a more than 2% shareholder; as can be seen from the cited sources.

 

What they are telling you is not a proper treatment for a more than 2% shareholder as it would be for a non-owner employee.

 

As I mentioned, some shareholders use the corporate account to pay personal expenses. In that case, you would not report the premiums as a deduction from taxable wages. If it is like a Friend of Court deduction then, as in that case, the total gross wages before the deduction are subject to income taxes and FICA/Medicare.

 

You will have to work with your client to decide how to treat the premiums paid - as the cited sources dictate or as they have told you.

 

I hope this helps you see the difference in the cited sources and what they told you.

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